The idea that companies should benefit society is as old as capitalism

BY: Rodrigo Tavares DATE: Jan 25, 2018 TOPIC: Impact Economy

BlackRock’s CEO Larry Fink made headlines last week when, in his annual letter to companies, he told CEOs that they would be expected to create not only profits, but contribute to society. But the truth is that this signals less a new ideal for doing business than it does the return to a very old one.

Scholars have long debated the origins of the first corporations. Some claim that Europe’s first commercial organizations were fourteenth-century mill companies based in Toulouse, France. Others surmise that the oldest business is Japanese Kongo Gumi, a temple construction company founded in 584. Many claim that the world’s fledgling restaurants, commercial wineries, and pubs—located in Austria, Germany, and Ireland in the 9th and 10th centuries – were indeed private companies and, therefore, merit the title. In the United States, the first important industrial corporation seems to have been the Boston Manufacturing Co., which was founded in 1813.

Experimental in nature and spaced out in time, these early ventures grew mostly independent of one another. But they had one thing in common: even as for-profit ventures, they were explicitly required to serve the common good.

For the first companies, the privilege of incorporation, often via royal charter, was granted selectively to facilitate activities that contributed to the population’s welfare, such as the construction of roads, canals, hospitals and schools. Allowing shareholders to profit was seen as a means to that end. Companies were deeply interwoven within the country’s or town’s social fabric, and were meant to contribute to its collective prosperity.

Companies focused on social purpose long before they focused on “shareholder value”

Kongo Gumi traces its origins to a commission given by Japanese Prince Shōtoku Taishi (572–622) to three carpenters hailing from what is now Korea. The prince desired them to construct the Shitennō-ji, Japan’s first Buddhist temple. A few years later, an independent, family-owned firm was established by one of these carpenters, with the express purpose of building more temples and shrines. Naturally, the business, which ended up remaining in operation until 2006, was driven by profit, but its mission and expertise—the building of religious temples—was profoundly embedded within a public belief system that has endured for thousands of years. Interestingly, in the late 19th century, a patriarch condensed a set of rules to preserve the family’s business. One of these edicts was to treat the community “with utmost respect” in alignment with the principles of Confucianism, Buddhism, and Shinto. The company, therefore, had an obvious social orientation.

The same pattern is detectable in medieval Europe. European corporations founded between the 11th and 16th centuries were borne of guilds, loose organizations of merchants and craftsmen that were formed to oversee the practice of their crafts within a particular town. Guilds were approved by the monarchy only if they served public purposes. They were tasked to regulate industry standards and competition, wages, and labor conditions, and offered mutual aid and protection. With time, guilds enforced monopolistic practices and dominated political governance in their regions of operation in order to maximize their wealth, but until their decline in the 16th century, they were responsible for promoting their own, as well as the town’s general prosperity. They performed charitable work, and built residences (called guildhalls), schools, roads and churches. Guild courts and officials punished those who strayed outside the guild’s rules and standards. As an example of this justice, the royal charters that incorporated London’s guilds (called livery), such as the one that established the Worshipful Company of Mercers in 1394, clearly determined that they would need to make provisions for members who found themselves in difficult financial straits.

A similar setting flourished in the United States at the time of the first European settlers. Early corporations were also akin to guilds or townships. As land came under private ownership and underwent settlement and self-governance, towns were incorporated upon petition of the owners and residents. Moreover, as private organizations, they were tasked with providing local services and in overseeing the welfare of the community: tasks which would include building and running schools, taking care of the elderly and sick, ensuring the safety of residents, and overseeing the poor. Hundreds of New England small cities still boast road welcome signs displaying the date that they were “incorporated”. One such example, Dartmouth in Massachusetts, was incorporated in 1664. Kittery, the oldest town in nearby Maine, was incorporated in 1647.

Since these early ventures, the idea of corporation has grown into all forms and shapes, becoming the blood flow of today’s modern global economy. However, even with Carnegie-like philanthropic grand gestures, companies still ended up abandoning their original purposes to cater to the interests of a wider range of stakeholders. In the 1970s, the neoclassical economics faculty of University of Chicago, led by Milton Friedman, openly advocated what CEOs across the Western world only defended behind closed doors: the sole purpose of a company was to make money, even if that windfall be attained at the expense of others.

Why the future of companies may look more like the past

It is true that a few decades ago, companies started to become more aware of their surroundings. Compliance with new labor laws, better risk management, and the sponsoring of campaigns and initiatives that provided good PR became common practice. In fact, the largest corporations set up their own foundations and charities for that purpose. The Walmart Foundation, for instance, was established in 1979. Even so, these activities, regardless of how positive, were suburban to the core business of corporations. They were built out, not in.

Predictions are that the future of companies will bear a resemblance with their distant past, when they needed to fulfill public purposes in order to stay in business. Presently, with a staggering number of studies showing the superior economic performance and lower risks of companies that have espoused corporate social responsibility practices and incorporated the interests of a gamut of stakeholders within their core business strategies, it seems to show plain poor management to grow a company motivated solely by money-grabbing. The pressure to buck this trend is already popping up from everywhere: consumers, employers, suppliers and investors. As a result, an impact economy, driven by profits and purpose, is gradually mainstreaming.

Shigemitsu Kongo, the founder of Kongo Gumi and likely the world’s first CEO, got the formula right. Companies are not NGOs; they are indeed driven by profit – but doing good can still be quite lucrative.